Bloomberg is reporting that executives from Spotify met with Securities & Exchange Commission representatives recently to discuss the former’s supposed plan to bypass the traditional IPO path and go the direct listing route instead on the New York Stock Exchange (NYSE). “A direct listing also avoids underwriting fees and restrictions on stock sales by current owners, and doesn’t dilute the holdings of executives and investors,” says the report.
This is an atypical route for a company – but not completely without precedent. What a direct listing means in effect is that the company in question would not issue any new shares or raise any new capital – but it would allow existing shareholders to trade their shares in the open market. This means anyone can buy shares and this can have a knock-on effect in that the company going for a direct listing cannot control the price of the IPO (the laws of supply and demand take precedence); but it could also mean the price fluctuates wildly as the market prefers investors who want to hold onto their stock for the long term as this gives it greater stability.
There are, however, benefits to this approach. It can be cheaper as underwriter fees are taken out of the equation and it avoids diluting the existing shares and, as such, retains the power of existing shareholders. There is also no “lock-up period”, meaning early investors and staff with stock options can cash them in quickly should they so wish. For Spotify in particular, this could speed up the whole process – an imperative given the clock is ticking around some of its covenants (based on $1bn in convertible loans) that will see interest on its debt increase every six months until it goes public.
The two key issues here – and why the SEC is so keen to monitor this move by Spotify, should it come to pass – are the size of Spotify (it has a valuation of $13bn and no company of its size has gone this way) and the fact it would be a first for the NYSE. Venture Beat says all of this could be possible due to the backdrop of the NYSE recently asking the SEC to amend its listing standards to facilitate more direct listings happening (a move that even has its own name now – “the Spotify rule”).
The Bloomberg report adds that a long-term deal with Warner Music Group is still pending and this could delay any move by the company to go public.
Last week, Sky reported that Goldman Sachs Investment Partners has reportedly sold under half of its shares in Spotify – estimated to be worth $75m. This inevitably fuelled rumours about what this could all mean for its valuation and investor faith in its route towards profitability.